Hello and welcome you are listening to Patrick Boyle on
Finance, a podcast exploring ideas from quantitative finance,
examining events occurring in markets right now and financial
history to see what lessons can be taken away, including
interviews with some of the most interesting people in the world
of finance. To learn more about the podcast,
visit on finance.org. The French bank Societe Generale
has struggled with unauthorized trades occurring on their D1
trading desk in the past. By struggled I mean lost $5.2
billion in 2008 and caused Ben Bernanke, who we call the Ben
Bernanke around here, to cut interest rates by 75 basis
points, the largest interest rate cut in more than 20 years.
At the time. The rogue trader in question was
Jerome Curvier who managed to go unnoticed amassing a $50 billion
position in Euro stocks futures and when Sokchen discovered his
unauthorized trades, they notified their regulator and
quickly began selling the position.
Markets were quite illiquid at the time as the US market was
closed for the Martin Luther King Day holiday.
But U.S. stock futures were trading in the overnight market
and the selling pressure caused S&P futures to trade limit down.
Newspaper headlines began calling today Black Monday, and
fears of a worldwide stock market crash were so intense
that the Federal Reserve held an extraordinary emergency meeting
where it was decided to slash interest rates.
The Federal Reserve later said that they had planned on cutting
rates anyhow for real economic reasons, and that they had just
brought the rate cut forward by a week to prevent a stock market
meltdown. The futures position that Jerome
Kerviel had built was far larger than the bank's entire market
cap at the time, which raised some eyebrows when Kerviel
initially claimed that his bosses knew what he was doing in
court. He admitted to exceeding trading
limits, faking documents and entering false data into
computers, but said that he was really just a cog in a broken
machine and innocent. In a twisted world, that's often
the way that I feel, too. Kerrville's lawyers described
him as a humble young Breton passionate about banking and
economics, who was corrupted by suicidal generale, a pawn in a
global frenzy for profit, and called for him to be cleared of
all charges. Jerome was sentenced to five
years in prison but only served five months.
He was briefly the world's poorest man, owing the bank $6.3
billion. This was later reduced to $1.1
million. After being released from
prison, Kerviel met with the Pope and embarked on a bizarre
pilgrimage from Rome to Paris in a stand against the tyranny of
the markets. After the Kerviel incident,
Salkjan went to great lengths to improve their risk systems.
A $5.2 billion loss does tend to focus the mind.
The bank's new CEO told investors last September.
That strength is best in class risk management and on the
strong foundations high performance businesses can
thrive. You can only imagine my surprise
when I read the Bloomberg headline earlier this week.
Sock Gen. traders in Asia exit after options bets go
undetected. This problem had once again
happened on the bank's D1 desk, and according to Bloomberg, the
bank's risk systems had failed to register complex stock
trades. Now, first up, I would argue
that it's just time to change the name of the desk at Salk
Jen. That way, if another disaster
occurs, at least it won't have that Groundhog Day feeling.
The D1 desk basically does boring hedging trades with
minuscule margins. Maybe rename it the Low Profit
arbitrage desk, and it might attract a different type of
employee. You just don't need the type of
guy who thinks that he's joined an elite Special Forces military
division trading baskets of stocks against an ETF to earn a
basis point. That's clearly a recipe for
disaster. Anyhow, according to the
article, a pair of traders in Hong Kong left Salcgen after the
bank discovered a batch of risky bets that went undetected by the
firm's risk management systems. And amusingly, one of them
responded to this story yesterday with a rant on
LinkedIn. Now look, before I'm accused of
picking a bad photo of Kavish, the trader in question, as
clickbait from my video thumbnail, I didn't dig through
his Instagram and find a photo of him and his wife's
sunglasses. This is his LinkedIn profile
photo, and if you're hiring, he's open to work.
Look, it's 2024, and after a lockdown in a few years of
working from home, this is what a professional photo of AVP at
an investment bank now looks like.
And if you're being judgmental, that's on you.
OK, sure, I might have changed the background a bit, but I'm
just trying to present him in the best possible light.
I think he would probably be happy with the change anyhow.
Bloomberg reports that Kavish Kataria, a trader on the bank's
D1 desk, departed last year along with the head of his team,
Ken Ng, after an internal review of transactions on the desk.
Bloomberg's sources say that while Sokgen didn't lose any
money from the transactions, the trades could have cost the firm
hundreds of millions of dollars had an intense market downturn
occurred. Now, normally in situations like
this, the people accused of wrongdoing keep quiet and allow
their lawyers to represent them. But in this situation, Kavish
Katara decided, in the style of Sam Bankman Freed, to instead
present his side of the story on social media.
Who needs lawyers anymore, right?
In his LinkedIn post, Katara writes trading industry is so
big, but there are no rules or regulations which fight for
Trader justice. Qatara might be right.
And who's better positioned to stand up for Trader Justice than
me defund compliance? A Salk Gen. spokesperson told
Bloomberg that their strict control framework allowed them
to identify A1 off trading incident in 2023, which didn't
generate any impact and LED to appropriate mending measures.
Qataria wrote on LinkedIn that he was being made a scapegoat
and said that all of his trades were correctly recorded and
visible to his supervisors in both Hong Kong and Paris.
He went on to say instead of taking the responsibility of the
lapse in their risk systems and not identifying the trades at
the right time, they fired me and terminated my contract.
In his post, he claims that he didn't conceal his trading
activity and that all trades were booked automatically in the
bank systems, generating an e-mail to others within the firm
showing the trades had been reconciled.
Now, at this point, it might make sense to quickly go over
what the D1 desk at an investment bank does.
It's a trading desk that's possibly more defined by what it
doesn't do than what it does do. D1 desks trade financial
products, including derivatives that are not options.
Usually. D1 desks are part of the
equities division at a bank, and they deal in baskets of stocks
and related derivatives like futures and forwards.
Conveniently for us. SocGen has a page on their
website explaining this. It says a D1 product is simply a
product that has a delta of one. It's therefore a derivative with
a linear and symmetrical payoff profile since it's delta remains
around one regardless of changes in the underlying asset.
And then to clarify, they say it's therefore a product with no
optionality. Now, in his defence on LinkedIn,
Kataria implies that the reason he lost his job is that he
traded options on Indian indices.
You'll note that the definition of a D1 desk was that it trades,
not options. Kataria goes on to say this
strategy was one of the different strategies which I
used to run on Indian indices. There were some of and right
positions as well as index options as well as single stock
options on Indian indices on which risk reporting was done on
daily basis. This clearly tells you that they
knew options were traded on the desk and this was not completely
new on the desk. I won't lie to you, while I am
fighting for traitor justice, it was not easy reading the piece
that he wrote on LinkedIn because of the grammar,
punctuation, spelling errors. I don't know who hires these
people. I'm guessing that oven right
positions means overnight positions and that risk res
porting means risk reporting, but I don't want to put words in
his mouth. Maybe not everyone knows this,
but if you decide to channel SPF and defend yourself from
accusations of fraud without relying on a lawyer, you can
still rely on spell check. And if every word that you've
written is underlined in red, it means that something's gone
wrong. Maybe someone's played a trick
on you and flipped your keyboard upside down, which is not a nice
thing to do to someone who's just lost their job.
But come on, Kovish, pull yourself together.
You're a vice president. If something happens to the
president, you're going to be in charge.
We need to sort this stuff out. Anyhow, back to the problem of
the Delta shortfall on the D1 desk.
Bloomberg reports that Qataria was hired by the Hong Kong
office of SoC Gen. in 2021 and that he focused on trading
Indian shares. They say that it's alleged that
some of his trades were not logged correctly in Sock Jen's
back office systems because Qataria executed options trades
during the day with no overnight positions and he tended to
arrange them for the date when the contracts expired.
The article says that when Sukjan discovered these Indian
options trades, they stress tested the positions to see how
they would have performed in a falling market.
And the stress tests allegedly found that in the most extreme
case, they could have potentially lost the bank
hundreds of millions of dollars, which is bad.
But on the bright side, hundreds of millions of dollars is way
less than the billions of dollars lost by Jerome Kerfiel
back in 2008. So things are moving in the
right direction there at Sock Gen.
According to the Financial Times, Qatari is not accused of
breaching risk limits on his trades, but of trading options
on Indian indices, which Sock Gen. say he was not supposed to
do. And risk limits don't just apply
to position sizes. They also apply to which
financial instruments a trader is authorized to trade.
Usually traders are well aware of what they're allowed to trade
and what's off limits. In his LinkedIn post, Kataria
wrote. I would like to ask during all
this time there was no one to check what has been happening on
the desk, he went on to say. I accept I did trade options on
Indian indices and according to me it was in my mandate and well
within the trading limits. Now I'm doing my best to fight
for traitor justice here, but when appealing to authority,
according to me I was allowed to do the trades is not really the
best defence. You really have to claim that
someone up the chain of command authorized you to trade
financial products that your job description, D1, specifically
says that you don't trade. His point that it took months to
discover these allegedly unauthorized trades does raise
questions about how good the risk systems are at Salk.
Gen. Matt Levine at Bloomberg wrote
about this story yesterday, saying that he doesn't have a
fully developed theory of D1 roguishness, but it does seem to
have a higher than usual incidence of roguishness.
He says there's something about its technicality about the
discipline of making money by buying and selling almost but
not quite identical things that might give people ideas,
especially at Salk Gen. I'm just hoping that given
enough time, Matt will come up with a unified theory of D1
roguishness, as this needs to be understood better by all of us.
In a follow up post on LinkedIn, Kataria wrote in spite making
more than 50 million PL. for the bank in eight months, I was
fired without even paid single penny.
My previous year bonuses were also withheld and I was just
paid 7 day salary. If I've done the mistake then
the entire risk team and other bosses are responsible for the
same. For not identifying my trades, a
commenter on his LinkedIn post asked him if trading options on
the D1 desk was actually part of his mandate and he replied
According to me it was and if the same was not then it should
have been stopped on day one rather than taking more than
four months to detect. To the same there were trades
which were booked overnight and the risk was reported on those
trades. They were only not able to
capture the risk on intraday trades.
Now once again, I'm not entirely sure what any of that means.
Grammar, punctuation and spelling do matter.
But I think what he's saying is according to me, it was within
my mandate and I'm innocent because I wasn't caught right
away. I'm not sure though.
It's difficult to interpret this and that's why people often use
lawyers, or at the very least spell check.
Kataria claims in his LinkedIn post that he had made $50
million for the bank in eight months and says my previous year
bonuses were also withheld and I was just paid seven days salary.
This is often how things work at banks, where a lot of your bonus
compensation is withheld and can be clawed back if you make big
losses at some point in the future, or if you're let go for
a gross misconduct. There's an argument that if a
trader makes an honest mistake and steps outside their mandate,
their manager could just take them aside, explain the problem,
and give them a warning and move on.
On the other hand, if that mistake involved breaking the
rules and risking hundreds of millions of dollars to make
$2,000,000, it might imply that you're not very good at your job
of weighing risk in return, and that could be grounds for
dismissal. We don't actually know many of
the details of what happened. Everything that's in the press
is hearsay and a person is innocent until proven guilty.
Salk Gen. reported earnings this morning which were not as bad as
expected, and the CEO told the press that the unauthorized
trading in Hong Kong had no impact on the group or its
clients and was detected in the due course of things by the
bank's control systems, which were shown to be effective.
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